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Reading time: 5 minutes

Your Friday Five

Every Friday we distill 200+ insurance, legal, and market-risk articles into three signals your board may need for its Monday briefing.

Three developments caught our attention this week:

• Wall Street Journal blamed the thermometer for the fever - missing the digital predators that destroyed eight insurers
• Industry leaders defend Demotech's critical role after WSJ resurrects old concerns already addressed by the market
• The $85 billion premium market exists only because an Ohio actuary took a chance on regional carriers.

I long for the days when the Journal seemed less biased and actually readable. Ignorance was bliss.

The Rating Agency That Saw What Wall Street Missed

Summary

The Wall Street Journal published a critique (hit piece?) of Demotech last month.

Their case: Insurers rated by Demotech were 30 times more likely to fail than those rated by competitors. By the way, when one rating agency has a 99.99% survival rate and the other rating agency has a 99.03% survival rate, insurers rated by the second rating agency are 97 times more likely to fail. This statistic is a nothing burger.

What the Journal missed: Petrelli exposed what actually destroyed several carriers - a coordinated digital assault he calls 'Tech-Enabled Claim Instigation.' Opportunists weaponized search engines and online technology to secure litigated claims at industrial scale.

Demotech’s research project immediately found a small public adjustor spending $50,000 monthly on Google ads to “impersonate” and target insurers. Today, litigation funds billions in third-party capital because the digital assaults work. Louisiana saw as many as 850 homeowners have their claims or settlements hijacked by lawyers they never hired.

While the WSJ was recycling criticisms from 2020-2021, Petrelli had identified the pattern behind the failures that no traditional rating model could detect, nor any other rating agency had detected: carriers with 3% market share suddenly handling 20% of all litigated claims.

(source)

So what?

The WSJ's critique rests on a fundamental misunderstanding of what happened in Florida and Louisiana, including the failure of American Capital Assurance Corporation which was rated by AM Best and Demotech.

These were not rating failures. They were algorithmic attacks that could have destroyed other carriers with similar balance sheet strength. Petrelli saw a pattern in the litigated claim counts while others blamed weather or reinsurance. He commissioned the research that uncovered the targeting of insurers online.

The real story isn't that Demotech maintained A ratings too long. It's that one where an actuary in Ohio developed a research project that identified a business model attracting billions in a shadow litigation economy while Wall Street was still checking loss reserves.

​Read our April report where we broke down how litigators are weaponizing the internet against insurers - and what boards can do about it.

Industry Rallies Behind Demotech's Market-Making Role

Summary

The insurance industry's response to the WSJ article was swift and telling.

Kyle Ulrich of the Florida Association of Insurance Agents - who criticized Demotech in 2022 - declined to pile on, noting "there isn't anything new on that topic." The Insurance Journal highlighted Petrelli's response: these are old concerns that have already been addressed. The market has moved on.

The WSJ would be wise to do the same.

Demotech rates approximately 460 insurers writing $60-85 billion in gross premium annually. Some also carry AM Best ratings. Without Demotech's willingness to evaluate regional and specialty carriers and recognize their nuances, hundreds of companies couldn't write business in states requiring ratings for compliance.

(source)

The LION Lens

What happened - Demotech created a rating methodology that evaluates small insurers based on reinsurance and operational metrics rather than just size, tenure and surplus.

Why it matters - This opened mortgage-compliant markets to regional carriers, creating competition in abandoned territories and providing coverage where nationals withdrew.

Practical implications - Consumers and financial institutions in many catastrophe-prone states have insurance options only because Demotech rates carriers that others won't.

So what?

Nearly forty years ago, Petrelli built what local insurance markets desperately needed: a rating system for Davids, not just Goliath.

Demotech evaluates insurers willing to operate where nationals won't, backing their concentrated risks with heavy reinsurance. These carriers do not fit AM Best's models designed for diversified nationals. They require different metrics - which Demotech pioneered.

No rating agency - not AM Best with hundreds of analysts, not S&P with global resources - predicted or suspected tech-enabled claim instigation as a driver in increased litigation frequency. Their models evaluate financial metrics, not whether opportunists are hijacking policyholder searches. They measure loss reserves, not litigation weaponization. They assess reinsurance, not algorithmic attacks. Demotech created a research project that uncovered the online targeting.

Before Demotech, smaller insurers could not secure Fannie Mae and Freddie Mac approval. Regional carriers, despite strong reinsurance programs with limited operating history, were locked out. The establishment rating agencies wouldn't even return their calls.

Some frame Demotech's 98% A-rating distribution as grade inflation. The insurance market sees it differently. Demotech evaluates insurers willing to operate in abandoned markets, backing their risks with heavy reinsurance, and they need to accept a rating to be rated.

That's not loose standards - it's recognizing a different business model that everyone, from banks to GSEs to state regulators, has agreed to accept because Demotech’s impairment rates are all but identical to those the alternative rating agencies.

The LION POV

Demotech enabled competition. Those 460+ carriers represent billions in premium and millions of policies that wouldn't exist otherwise.

When evaluating carrier stability, recognize that traditional ratings measure traditional risks. The failures in Florida and Louisiana came from a new threat that no rating agency other than Demotech suspected: industrialized litigation operating at internet scale.

The Florida and other markets stabilized, in large part, because of Demotech. When nationals fled, Demotech-rated carriers provided continuity. Unlike publicly traded insurers that need to consistently grow profits year over year, privately-held or smaller Demotech rated are willing to “feast or famine” based upon the cost of reinsurance and the actualization of natural disasters. Remove Demotech from the equation, and entire states might lose their insurance markets.

The $85 Billion Market That Exists Despite Alleged Fragilities

Summary

Demotech-rated insurers write $60-85 billion in gross premium annually, serving markets where traditional carriers won't operate. The structural nuances are clear. Operating histories of some Demotech rated carriers average under 10 years. Other Demotech rated carriers are small but have been in continuous operation for over 200 years. Their reinsurance programs must perfectly align with catastrophic exposure.

These 460+ companies provide the only coverage option in abandoned or rural markets: 50-65% of Florida homeowners premiums, one-third of Louisiana's property market, and 99% of the $16.4 billion title insurance sector are comprised of Demotech rated carriers.

So what?

Some of these carriers were vulnerable and tech-enabled claim litigation did them in. The vulnerability alone doesn't explain the collapse pattern.

Carriers that survived for years, securing unqualified audits and acceptable reserve opinions from actuaries suddenly faced an industrialized assault utilizing online technology:

• Law firms spending millions on Google ads to target insurers
• Billions in third-party litigation funding targeting their policyholders
• Companies with 3% market share generating 20% of new litigation
• Resulting in loss ratios spiking 30-40 points within 24 months.

Some facet of their claims handling made these carriers attractive targets for digital opportunists. Of the Demotech-rated carriers that collapsed, the weakest fell first - systematically hunted and attacked, not randomly failing.

Traditional rating models measure whether a carrier can survive in its intended market, given its capital structure. In 2020-2021, no model - AM Best's, S&P's, or Demotech's - measured whether a carrier could survive algorithmic attacks online at industrial scale, funded by third parties banking on the business model to secure a superior rate of return on their investment. As a result of Demotech’s research, awareness of the online business model and a solution, 4WARN.com, were born.

For boards evaluating carrier partnerships:

• Recognize the new risk exposure: Traditional metrics (surplus, reinsurance adequacy, etc.) being tested by digital, online vulnerability (online presence control, claims intake security)
• Monitor hunting patterns: When litigation ratios diverge from market share and historical levels, you're being targeted.
• Accept the paradox: Purchasers of insurance systematically transfer risks to insurers first, and guaranty funds, second, when new phenomena are put in place.

Demotech rates regional carriers because they understand the nuances of these carriers. Absent Demotech, entire markets may cease to function. Demotech enables carriers to serve emerging markets, and Demotech’s research project uncovered what is killing markets and destroyed carriers in 2020-2021 – two crucial points the WSJ missed entirely.

The Bottom Line

The Wall Street Journal saw insurer failures and blamed the rating agency. Years earlier, Petrelli saw the same failures, vetted Demotech’s review process, and saw increased levels of new litigated claims that belied the market share of the failed carriers. The research project Petrelli devised identified a coordinated, online digital assault on the insurance industry, and other sectors.

The WSJ article rehashed old news. The article refused to discuss how Demotech protects entire markets – whether by rating carriers or providing insightful research on increased litigation.

In fact, Demotech does more than rate insurance companies - it enables entire markets to exist where the establishment will not venture and offers insights on increasing levels of litigation that no other insurer rating offered.

For the insurance industry and the millions of policyholders of Demotech rated insurers, this is the story that should matter.

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Stay Covered,

Natasha & Mark

Co-Founders and Managing Partners

LION Specialty

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